SMIC (0981.HK)_ Revenue and margin to continue to recover; capacity expansion to capture local customer demand

Industry/Company Involved: Semiconductor industry, specifically SMIC (0981.HK) Key Points: * Revenue and Margin Recovery: SMIC's revenue and margin are expected to continue recovering, driven by a healthier inventory level and localization trend. However, the continuous capacity expansion, increasing supply of mature nodes, rising competition, and geopolitical risks remain concerns. * Demand Outlook: The company's demand outlook is positive, with a gradual recovery expected in the industrial and automotive segments in 2H24E, as inventory digestion completes. * Gross Margin: SMIC's gross margin is expected to gradually recover, impacted by the increased D&A burden due to continuous capacity expansions. * Target Price: Goldman Sachs raises its 12-month target price for SMIC's H-share by 14% to HK$33.4, based on a 34x 2025E P/E multiple. The A-share target price is raised by 14% to Rmb83.9, based on a 273% premium over the H-share target price. * Earnings Forecast: The company's revenue forecasts are raised by around 1% each year in 2025E-29E, and gross margin is expected to increase by 0.2~0.3ppts on higher utilization rates. * Rating: Goldman Sachs maintains a Neutral rating on SMIC (A/H). * Key Risks: Better-/weaker-than-expected demand in smartphones and consumer electronics, faster-/slower-than-expected end-market diversification, and restricted access to certain equipment/material supply due to SMIC's inclusion on the US BIS Entity List. Additional Important Points: * Utilization Rates: SMIC's utilization rates are expected to recover gradually, as shown in Exhibit 9. * Inventory Days: Inventory days for China's electronics manufacturing industry returned to 51 days in October 2024, in line with historical levels, supporting demand recovery. * Earnings Revision Summary: Exhibit 3 provides a summary of earnings revisions for SMIC. * Valuation: SMIC's stock is trading at around its historical average P/E, which is considered reasonable considering its solid long-term growth prospects and market weakness in the near term. * M&A Rank: SMIC has a M&A rank of 3, indicating a low probability of being acquired. * Quantum Database: Goldman Sachs' proprietary database, Quantum, provides access to detailed financial statement histories, forecasts, and ratios for in-depth analysis of SMIC and other companies. Source: Goldman Sachs Research, SMIC (0981.HK) Research Report